It has been more than three years since the government opened the National Pension System (NPS) to the corporate sector, with the intent of transforming India from an almost pension-less society to a pensioned society. As a pure and real pension scheme offered by the government, NPS has attracted a fair bit of attention.
What is it? NPS in Short
NPS is a defined contribution style superannuation scheme launched by the government, originally for government employees in 2004 and subsequently extended to the citizens of India in 2009 and to the corporate sector in 2012. Within the corporate sector model, both the employer and the employee may contribute to the employee’s NPS account. The contributions made, along with the returns, will be available to the employee upon retirement for a combination of options including part commutation and purchase of annuities.
Up to 10% of the basic salary per annum can be contributed by the employer on behalf of the employee and the entire contribution does not attract tax in the hands of the employee. The same contribution by the employer is also allowed as a business expense. Additionally, an employee’s own contribution is eligible for tax deduction for up to 10% of the basic salary, with an overall ceiling of `1.50 lacs under Sec. 80 CCE of the Income Tax Act.
From FY2015-16, an employee will also be allowed a tax deduction in addition to the deduction allowed under Sec. 80CCD(1) for additional contribution to his/her NPS account, subject to a maximum of `50,000/- under Sec. 80CCD 1(B). As such, effective tax benefits on investments has increased to `2.00 lacs from the current financial year.
In addition to the attractive tax benefits for both the employer and employee, the NPS also scores in other key parameters. These include:
- High portability with a unique NPS account number provided to each employee, which allows for easy transferability during change in employment
- High flexibility in terms of choice of fund managers and asset classes
- Exposure to market and equity linked returns
- Regulated by the statutory body – The Pension Fund
- Regulatory and Development Authority (PFRDA)
- NPS is one of the lowest costing pension schemes in the world in terms of fund management and administrative charges
As seen alongside, the NPS corporate registrations and assets under the management have been showing healthy growth rates over the last few years. As on March 31, 2015, 3,73,273 corporate employees were covered under the NPS. However, it should be noted that while more than 1,600 corporates have registered under the scheme, not all may have started contributing on behalf of their employees.
If we also include government employees and private individuals, the total member subscriptions would stand at 87,48,649 and the total assets under management would be Rs.80,855 crores as on March 31, 2015.
Aon Hewitt NPS Benefits Survey 2015
Aon Hewitt conducted a market pulse study to draw insights and feedback from corporate employers, both subscribers and non-subscribers to NPS.
There were a total of 138 companies who participated in the survey, with maximum participation from BFSI and IT/ITeS sectors.
Approximately 33% of the survey respondents were enrolled for NPS, with BFSI and FMCG/FMCD companies driving this number.
In terms of the implementation strategy adopted by employers, the key insights drawn from the survey are:
- Two-thirds of the companies who have enrolled for NPS have offered the benefit to all their employees
- The majority of subscribing companies have included the NPS benefit as a part of their flexible compensation structure, where an employee can choose whether or not to opt for this benefit
- Most organizations prefer to appoint Points of Presence (administrators), which are banks with whom the organizations have their salary or corporate accounts. The key expectations from POPs include professional service levels, quick resolution of queries and geographical presence across India
Employees and Communication
One disturbing trend observed from the survey results is the dismal participation/enrollment of employees in the NPS scheme. Only 20% of the organizations that have implemented the NPS have achieved employee subscription of 10% and above.
An employer may have taken the first right step in setting up the NPS benefit for his/her employees, but the responsibilities continue beyond merely introducing the scheme. The fact that the NPS is voluntary and the employees can choose not to enroll for it makes it critical for employers to have an active and smart communication and awareness strategy around NPS. It is a clear challenge for employers to educate their employees to the point that they can make an informed decision about the scheme, especially for the younger generation who is openly inclined towards cash in hand. The strategy has to be set using the latest communication tools and has to be done on an ongoing basis in order to achieve a better rate of participation. This strategy may include:
- Wider awareness around lack of retirement savings and the eroding power of inflation in India
- Use of retirement and savings calculators to demonstrate ideal Net Replacement Ratios post retirement
- The modes of communication could be regular emails, posts on the intranet, presentations, social media campaigns, workshops, etc.
- Having a different strategy for blue and white collar staff
Employers should also be careful not to hard sell the NPS, and the communications should be more holistic in nature. It should be made sufficiently clear to employees that returns from NPS are market-linked and that there is a chance that employees’ expectations may not be met.
The concept of a strong, universal social security system has never existed in India. The primary reason for this has been the fact that India has been a developing country with the world’s second largest population to support. As such, historically, governments have always relied on individual savings and employer sponsored plans to meet the retirement and social security needs of the population. It is still early days for the NPS, and it remains to be seen if this scheme can achieve the mass appeal and scale within the retirement savings landscape that has been achieved by the decades old Employees Provident Fund.
FIA, FIAI, Actuary and Practice Leader, Retirement and Investment, Aon Hewitt
Senior Consultant, Retirement and Financial Management Practice, Aon Hewitt
Consultant, Retirement and Investment, Aon Hewitt